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Canada’s Oil Patch Struggles To Survive The Worst Recession Ever

Canada is likely going through its worst-ever recession, with more pain to come in May when the statistics authorities and analysts will have a fuller picture of the economic disaster brought about by the coronavirus pandemic and the measures to curb its spreading.

The oil price collapse with the demand crash in the Covid-19 outbreak, and the month-long oil price war between Saudi Arabia and Russia are pressuring Canada’s economic activity, more than 5 percent of which comes from the oil and gas sector.

Canada’s oil industry – which contributed US$77.4 billion (C$108 billion) in direct real GDP to the economy in 2019, or 5.6 percent of Canadian GDP – was hit hard by the double supply-demand shock over the past two months, becoming one of the first collateral victims of the Saudi-Russian spat.

The recovery of Canada’s oil industry after this shock will be slow, considering the fact that the global glut threatens to fill up all available storage by as early as mid-May. Many firms may not survive this price crash.

Because of the importance of the oil industry in Canada’s economy and trade in goods, overall economic recovery in the country could be slower than analysts had initially predicted and slower than in other advanced economies that are not big oil producers.

A Reuters poll of 25 economists at the end of April showed that Canada’s economy likely shrank by 9.8 percent annually in Q1 and is set for a 37.5-percent plunge in Q2.

In a flash GDP estimate in mid-April, Statistics Canada said the economy contracted by 9 percent in March, the steepest one-month GDP drop ever since the series started in 1961. More than 1 million people lost their jobs in March, with employment rate down by 3.3 percentage points to 58.5 percent—the lowest rate since April 1997.

The energy sector in Canada is now even more pessimistic about its prospects than it was during the 2008 recession or right after the previous major oil price crash of 2014, according to a recent Bank of Canada Business Outlook Survey (BOS).

Most oil and gas firms in Canada “saw the current shock as worse than those in 2008 and 2015 as access to financing had become more difficult. Indeed, while some thought they could withstand a period of low oil prices, many were concerned about access to financing amid declining equity prices, widening credit spreads and a general reduction in risk appetite,” Josh Nye, Senior Economist at RBC Economics, said in a note in early April.

In the flash estimate for March GDP, Statistics Canada said that “Despite the collapse in oil prices and the pullback in the sector’s investment activities, early indications seem to show that the volume of oil and gas extraction and pipeline transportation had not yet been substantially impacted in March as storage facilities were still being filled.”

But in April and through the summer, the suffering in the oil patch will become painfully evident, with companies slashing capital expenditure and curtailing production as demand crashes, storage fills up, and Western Canadian Select barely manages to stay above US$0.00 a barrel these days.

“While it’s encouraging that there’s an agreement to end the irresponsible global oil price war, much damage has been done. The damage to the Canadian energy sector will be longer lasting due to the liquidity crisis triggered by these market manipulations,” Tim McMillan, president and CEO at Canadian Association of Petroleum Producers (CAPP), said after OPEC+ patched up the broken alliance to promise nearly 10 million bpd off the market in May and June.

CAPP works with “federal and provincial governments to help ensure adequate support is in place to enable survival of oil and natural gas sector which is so critical to Canada’s economy,” McMillan said early last week.

The federal government is funding a US$717 million (C$1 billion) program to provide grants to oilfield service contractors to perform well, pipeline, and oil and gas site reclamation work. The program is expected to keep 5,300 jobs in the oil industry at a time when many oil workers are losing their jobs.

Oil production shut-ins could reach 1.1 million bpd this summer, ATB Economics said this week, expecting Canada’s oil production to slump by 14 percent compared to the over 3.5-million-bpd output in 2019. That is, if things with the pandemic, demand, and oil prices improve by the fall. Most analysts concur that Canadian oil firms are likely to curtail at least 1 million bpd of production in the coming months.

“There’s no way to sugar-coat it: the recession brought on by COVID-19 and the oil glut will be the worst downturn in Alberta since the 1930s,” Todd Hirsch, Vice President and Chief Economist at ATB Financial, wrote in a note last week.

The recession will be brutal, the recovery “will not be as V-shaped as we’d like, but the downturn will pass much sooner than it did in the 1930s,” Hirsch says.

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